Why cheap gas causes riots

Last week, riots broke out in Yemen after the government ended a fuel subsidy program that led prices to nearly double as officials struggled to close a yawning budget gap. And while, for now, things are calm in Egypt, security forces remain on alert as the government cut subsidies and warily raises gas prices in hopes of reviving an economy battered by more than three years of political turmoil.

It’s easy to see why consumers would react negatively. In Yemen and Egypt, fuel subsidies account for more than one-fifth of government spending. Poor consumers are understandably angry when they see cheap gas – a tangible benefit – go away without a clear understanding of what the true costs of that benefit really are, and perhaps more critically, if and how they will be compensated for their loss. As we’ve seen in Egypt where the government has for decades talked about the need for subsidy reform, the risk of riots and consumer anger often spook governments into inaction until fiscal pressures force fuel prices to suddenly spike.

Yemen and Egypt could have largely avoided these problems. Rather than delay reforms until crisis erupts, governments should lay the groundwork for reform by communicating to citizens the full costs of subsidies. While the perks may translate to cheaper gas, it’s worth considering the unintended consequences: subsidies distort markets, strain government budgets, encourage overconsumption, foster corruption and harm the environment. Moreover, they do little to remedy inequality or stimulate development. Subsidies are also highly regressive – the richest 20% of households in low- and middle-income countries use six times more subsidized fuel than the poorest 20%. Governments must also communicate to consumers how alternative anti-poverty measures, such as targeted cash transfers, can better protect the poorest in society from the hardships of higher fuel prices.

Having a targeted communications campaign to support reform plans is critical to the success of those plans, according to a 2013 IMF study. Iran, which reformed its subsidy program in 2010, conducted a broad public relations campaign before reforms took effect; the government explained how consumers would be compensated for higher energy prices and the overall benefits to the country. Ghana’s efforts to phase out fuel subsidies were helped by publicizing an independent study that showed how the poor would benefit.

The reality is that far too few governments recognize the value of laying the groundwork for reform. Moreover, there is no place for them to turn for a solution that combines technical expertise with marketing capabilities. This is reason to support the creation of a new public-private partnership, the Global Subsidy Elimination Campaign (GSEC). The agency would work with governments to execute country-specific communication programs to build the case for fuel subsidy reform among citizens; it could be housed within the World Bank but have its own board and budget – a model similar to that of the Consultative Group to Assist the Poor, giving the agency access to the Bank’s research capabilities while allowing it to act nimbly and independently.

Over time, the GSEC’s marketing campaigns could be instigated by the World Bank in consultation with client governments or commissioned on a fee-for-service basis by richer countries.

The U.S. should jump-start the establishment of the GSEC by providing half its initial funding. After all, curtailing subsidies would be strategically important, as geopolitically critical countries such as Yemen and Egypt will not see robust economic growth and political stability in the absence of successful fuel subsidy reform.

Funding could also come from others interested in the enormous potential of fuel subsidy reform. Such donors—including other countries, NGOs, the World Bank itself, and private foundations — should be motivated by an interest in poverty reduction and economic development, environmental concerns and strategic considerations. Host countries should be required to contribute at least 10% of their specific marketing campaigns as buy-in to the process.

Of course, public awareness campaigns will work only if matched by credible government action to replace subsidies with other more effective investments, such as targeted cash transfers and productive health and education spending. But with governments spending more than half a trillion dollars a year on fuel subsidies, the upside of fuel subsidy reform is enormous. Even a 5% reduction in fuel subsidies would free up billions of dollars of public spending for more effective anti-poverty measures.

The time is ripe to help governments make the case directly to citizens for fuel subsidy reform.

Isobel Coleman, a senior fellow at the Council on Foreign Relations, is the author of a recent Policy Innovation Memorandum, “How to Make Fuel Subsidy Reform Succeed.”

The 7 elections that will reshape the global economy

Leaders around the world are facing angry voters who want real change. Can they keep getting by on the same old promises, or is it time to clean house?

Rarely — maybe never — has global leadership been more up for grabs in a single year than it is now. Seven major nations are holding presidential elections — in chronological order, Russia, France, Egypt, Mexico, Venezuela, the U.S., and South Korea. That’s a list of hot spots worldwide, without mentioning Greek elections in April or China’s presumed next president, Xi Jinping (chosen without the bother of elections), assuming office in October. All elections are local, but these seven big ones will help determine what happens next on two of the world’s largest issues: how quickly we’ll get through the global economic funk, and whether repressing millions is still a viable strategy for national leaders.

The main issues in the established democracies — France, Mexico, the U.S., South Korea — are economic. That’s a bit odd, since the U.S. and French economies have performed terribly in recent years while the Mexican and South Korean economies came roaring out of the global downturn. Yet voters in all four countries are unhappy about their economic situation, and in all four they face a genuine contest between candidates representing fundamentally liberal and conservative management of the economy. Much is at stake.

Mexican and Korean voters are unhappy about income inequality and corruption. French and American voters are unhappy about unemployment and stagnation. The common factor is profound dissatisfaction with the leaders they’ve got; opinion polls show the incumbent candidates or parties trailing in all four countries. Voters may just throw the bums out. If they do so across the board, the policy effect will be large, since these countries currently have economically conservative administrations by a ratio of 3 to 1 (the “1” being the U.S.). That ratio could flip.

The essential issue is much different in Russia, Egypt, and Venezuela. For them, it’s the very nature of democracy after a year of unprecedented popular rage worldwide. In each case the most important developments may be what happens after the elections. Egypt, the most inspiring story of the Arab Spring, cannot get its act together. The generals decreed parliamentary elections though the country still has no constitution, nor will it have one before the June presidential election. So the results may be meaningless, depending on how the constitution gets written, or if the generals seize back power. How slow a transition will Egyptians tolerate?

Egypt is, with luck, a nascent democracy. Russia and Venezuela are bogus democracies. The Russian election hasn’t happened as I write this, but it will have happened as you read this. Don’t worry — I know how it turned out. In Venezuela, we can be similarly confident that Hugo Chávez, like Vladimir Putin, will use his near-dictatorial powers to ensure a win, though he faces a credible opponent. The key question is what happens then. Will Russians and Venezuelans accept their leaders’ phony reelections? They’ve always done so, but that was before the past year of demonstrations and public anger. There’s at least a chance that the people of all three nations will rise up to insist on genuine democracy.

That would be the best outcome, just as the best result in the four established democracies would be moves toward moderate, low-tax, market-friendly economic policies. Two wild cards could disrupt elections in any of these countries. One is foreign aggression. Incumbents can never appear weak in an election year, and North Korea or Iran could easily involve several of these countries in no-win conflicts. The other wild card is social media. We’ve seen its political power in the Middle East and Russia, but the effect is broader. In Mexico, for example, negative campaigning is illegal, but the law never contemplated social media, which are unregulated.

The last of the seven big elections will be South Korea’s on Dec. 19. Assuming the Mayan calendar theorists are wrong about the world ending two days later — personally, I will still be buying green bananas — we’ll have by then a much clearer picture of where our world is heading.

Rebuilding Egypt: How companies can fill the vacuum of trust

Business leaders working in the Middle East should not stand by the sidelines or hop on the next flight out. They should act to rebuild trust, wherever and whenever it is possible.

The unfolding protest movements in Egypt and across the Middle East have generated a dizzying mix

of joy, fear, and uncertainty throughout the world, leaving many in the business community involved in the region — including many of my students — confused and unsure over how to respond. How do they protect their employees as well as their bottom lines? And, in Egypt’s case in particular, how can they contribute to the reconstruction process?

While the region has suffered from significant economic distress, it has been relatively contained compared to the fallout of some corporate crises in emerging markets in the not so distant past; consider the Asian financial crisis of the late 1990s and the Argentine meltdown of a decade or so ago.

The Korean stock exchange reached its nadir on the last day of December 1997, and was followed by Thailand in late August 1998, and Malaysia and Indonesia in late September 1998. These low points represented a good 70-90% drop from the preceding years. Argentina’s low point was in mid 2002, and it represented a close to two-thirds drop. (more…)

Egypt and the growing problem of global inflation

When prices rise faster than economic growth, the outcome is damaging for any population, but especially for a young one like Egypt’s. Unfortunately, there are worrying signs that stagflation is spreading around the world.

Suffocating your citizenry with stagflation is a problem, particularly when that citizenry is young, hungry, and unemployed. By definition this is the Egypt we’re seeing today. While this may be a very old country (established in 3100 BC), this 21st century social revolution is being driven by the very young. Almost two-thirds of Egyptians are under the age of 30, and of the 79 million people who live in Egypt, approximately 40% of them live on less than $2 a day.

The Egyptian government has been telling its people that inflation is currently running around +12%. The people of Egypt obviously don’t believe that — and they shouldn’t. However, they do believe that the country is running double-digit unemployment. They don’t have jobs.

Captains of Keynesian economics don’t use the word ‘stagflation’ very much for a reason. The last time these bubble-makers plugged the world with stagflation was in the mid-to-late 1970s. That’s when US Federal Reserve Chairman Arthur Burns was attempting to monetize America’s debt as President Jimmy Carter bet that it would not create any globally interconnected risk. Sound familiar?

We call it stagflation when real-world inflation readings are growing faster than economic growth. Even if we were lemmings enough to believe the Egyptian government on a +12% inflation number, that would be plenty enough to justify calling this situation for what it is. Egyptian GDP is only running +5% at this stage of what the thinkers in Davos, Switzerland last week would have you believe is an “emerging market boom.” It’s sad. (more…)